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UK dividends: the winners and losers so far in 2017

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2016 was a fruitful year for income investors, with the total amount paid out by UK firms increasing 6.6% to top £84bn. This is clearly a boost for income-seeking investors, but those with long-term growth in mind should take note too.

Despite what has been a good year overall, dividend growth is never uniform nor is it a guide to the future, and there will always be winners and losers. With the majority of full-year results now released, I take a look back over how some of the more notable sectors have performed.

Please note all yields quoted are variable and not a reliable indicator of future income.

Boring banking with interesting returns

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Lloyds Banking Group’s core focus is on small and medium-sized enterprises (SMEs), consumer lending and UK retail banking. This may not have the glitzy investment banking of Barclays, or provide exposure to an exciting Asian growth story in the same way HSBC and Standard Chartered do, but with its sector-leading cost:income ratio and strong CET1 ratio (a measure of regulatory capital), Lloyds offers attractive dividend potential.

Full-year results showed it is starting to turn that potential into reality. Generating 190 basis points of CET1 capital enabled Lloyds to declare a 0.5p special dividend, even after absorbing the costs associated with the proposed MBNA credit card acquisition. This payment was on top of a 13% increase in the ordinary dividend, to 2.55p per share.

Looking ahead, the group has a progressive ordinary dividend policy and has previously said it’ll aim to return additional capital above a CET1 ratio of around 13% to shareholders, in the form of special dividends or share buybacks. The shares offer a prospective yield of 5.5%.

Building confidence

With Persimmon and Barratt Developments both extending their capital returns plans, special dividends were a theme in the housebuilders’ results too.

The UK’s housebuilders had been taking advantage of the favourable market conditions, with share prices sailing serenely upwards in recent years. However, last summer’s referendum upset the applecart somewhat, with shares across the sector tumbling on the back of the vote.

Despite an initial drop in activity, it has become increasingly clear that the vote to leave has not, as yet, dampened the mood of buyers. With transaction numbers holding up, and average selling prices continuing to rise, the builders have regained their confidence.

Persimmon added 25p per share to the 110p due to be paid this year, while Barratt Developments increased the ordinary dividend by 22% and extended the capital returns plan into 2018. With these already generous dividend plans being extended, prospective yields in the sector are 6% on average, significantly higher than the wider market (according to Bloomberg data).

As discussed in our recent article on the sector, investors will be heartened to see that balance sheets are stronger now than at the time of the last crisis, but should be aware that the sector is economically sensitive and sentiment in the sector can change quickly.

Estate agents feeling the strain

It’s not been such an enjoyable results season for everyone in the housing game, however. Estate agents are feeling the pinch, with Countrywide and Foxtons among those putting the brakes on shareholder returns.

Both groups’ lettings divisions are holding firm, but weaker sales trends saw profits decline. The uncertainty around the UK economy following the Brexit vote, and the disruptive impact of changes in stamp duty, are proving to be headwinds.

With the property market in the capital under particular pressure, London-based Foxtons is really feeling the squeeze. Full-year results contained no repeat of recent special dividends, and the ordinary payment was trimmed from 5.01p to 2p per share. This makes the prospective yield 3.6%.

Countrywide, which also has a large London exposure, scrapped the final dividend entirely and announced a new policy to pay out around one third of earnings in the future. Recent sharp declines in the share price mean the prospective yield is 4.8%.

While both businesses remain confident they can deliver returns for shareholders, analysts expect earnings to remain depressed in the near term. This makes the prospect of meaningful increases unlikely for now, and investors should remember that things could get worse still and income is variable and not guaranteed. The online and hybrid models utilised by new entrants such as such as Purplebricks, are adding further pressure.

Learning lessons the hard way

In its recent chastening profit warning, Pearson said profits were not going to be as high as investors had hoped, and also announced that the dividend would be cut.

The group is in the midst of a large scale restructure. Pearson CEO John Fallon identified an opportunity to build a presence digital education, and is committed to taking the group down this avenue. The Economist and Financial Times newspapers have been sold off, and the last of its major publishing assets, Penguin Random House, is in line to go next.

The idea was that the proceeds from these disposals would reduce the strain on the balance sheet, and tide investors over with a steady dividend until profitability moved up a gear from 2018. However, demand for higher education courseware in the US, Pearson’s main market, is falling. While the dividend was held this time, analysts are expecting a significant cut from 2017.

Despite this, given the magnitude of the price fall that accompanied the profit warning, the shares still offer a prospective yield of a shade over 4%. This could still prove attractive for those that believe in the long term story.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

George Salmon owns shares in Lloyds Banking Group.

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